fbpx

HOW TO MAKE YOUR JOB OPTIONAL”

Masterclass on January 22!

 What if you could enjoy a doctor’s lifestyle without depending on your clinical paychecks?

HOW TO MAKE YOUR JOB OPTIONAL”

Masterclass on January 22!

 What if you could enjoy a doctor’s lifestyle without depending on your clinical paychecks?

Accelerating Wealth Is Now open!

Don’t miss out! Grab this golden opportunity to enroll in Accelerating Wealth.  Enrollment ends December 8th.

Days
Hours
Minutes
Seconds

Zero to Freedom is Now Open!

Don’t miss out! Grab this golden opportunity to enroll in Zero to Freedom. Enrollment ends January 30th. 

Days
Hours
Minutes
Seconds

Zero to Freedom is Now Open!

Don’t miss out! Grab this golden opportunity to join the Spring 2024 Zero to Freedom course!

The Spectrum of Real Estate Investing Strategies

Summary: There are so many different options for investing in real estate that for a new investor, it can be pretty confusing. There are Real Estate Investment Trusts (REITs), real estate syndications, flipping and much more! So the natural question is, how do you choose? Why would you choose one option over another? In this two part series, we’ll cover the different criteria you can use to choose the investment strategy that’s best for you, and then we’ll apply these criteria to the spectrum of real estate investing options.

 

 

In part 1, we covered the different criteria you can use to choose an investment strategy that is best suited to you.

Now that we’ve explored the different criteria for choosing an investment strategy, let’s now look at the spectrum of options you have for investing.

We’ve ordered the investment strategies from low to high based on return on investment.

Ultimately, investing is about “achieving a profit,” so ordering it by return on investment seemed the most logical to us.

From there, we’ll discuss the other five criteria in order.

 

Real estate investment trusts (REITs)

REITs were established in the 1960s by Congress to give the average American a way to invest in large commercial real estate portfolios. REITs are the companies that form these large portfolios by going out and buying or financing different types of real estate assets. As an investor, you can buy shares in these companies just like you’d buy a stock in a company.

  • Return on investment: Very low. The return from REITs is low compared to other forms of real estate investing. The returns vary but generally range from 10-15% on average.

Here’s how the other criteria pan out:

  • Risk: Relatively low. The return is fairly reliable because REITs have large diversified real estate portfolios. So if the value of one of the properties goes down, the loss is mitigated by the other properties in the portfolio.
  • Level of involvement: Minimal. You only have to learn how to buy shares in a publicly traded REIT. Otherwise, you sit back and let someone else manage your money.
  • Control: Zero. Someone else is making the decisions to buy, manage and sell the properties in the portfolio.
  • Tax benefits: Minimal. The majority of the distributions are taxed at ordinary income tax rates.
  • Liquidity: High. Publicly traded REITs are highly liquid because they’re publicly listed like stocks and can be sold at any time. Other types of REITs are less liquid so be sure to check before you invest if liquidity is important to you.

 

Real estate syndications and funds – limited partner

Real estate syndications are pooled investments where a deal sponsor (also known as a general partner, see below) finds a real estate asset and raises money from passive investors (also known as limited partners). There are two main ways to be involved in a syndication. You could be the deal sponsor, who is the person who finds the deal, raises money from passive investors, acquires and manages the property. The other way to be involved is to be the passive investor. In this section, we’re covering the characteristics of investing as a limited partner. Below, we’ll cover the investment from a general partner’s perspective. [Editor’s note: If you’d like to be notified when we have opportunities for passive investments, please email us at syndications@semiretiredmd.com]

  • Return on investment: Low. The returns you get as a passive investor typically ranges in the 15-20% range. It’s usually better than what you can get with REITs or crowdfunding.

Here’s how the other criteria pan out:

  • Risk: Moderate to high. The risk of a syndication is largely due to the fact that your investment isn’t diversified. You’re often investing in a single real estate asset. The other risk is with the deal sponsor. You want to be sure that you are working with a reputable person, not someone who is operating a Ponzi scheme.
  • Level of involvement: Low to moderate. Your involvement can go up significantly if you spend the time to properly vet a deal. A big part of your due diligence is taking the time to evaluate the deal sponsor. Ideally you invest with someone who is reputable and has a track record.
  • Control: Minimal. As a passive investor, you have little control over the deal. Depending on your relationship with the deal sponsor, you can potentially have influence over decisions. However, the deal sponsor is the one who is ultimately making all of the decisions.
  • Tax benefits: Moderate. You can get passive losses and use these to shelter passive gains. A common misconception is that passive losses can be used to shelter your salary. They can’t. However, it is important to point out that passive losses can be used at the time of sale to shelter capital gains or salary.
  • Liquidity: Low. Once you put your money into an investment, it’s generally very difficult to get your money out. In rare cases, you may be able to negotiate with the deal sponsor to return your capital.

 

Turnkey rental properties

Turnkey rentals are properties that are sold to you either rented or immediately rentable. These opportunities are typically provided by turnkey companies. Sometimes these are provided by fix and flip investors. The draw for investors is that they don’t have to go through the trouble of finding suitable investment properties and fixing them up. However, outsourcing this part of the investment comes at a price (explained in more detail below).

  • Return on investment: Moderate. The return from these properties is better than any of the passive investments because you are an owner and you get the benefits of debt paydown, some tax benefits and market appreciation. However, the return is not as good as buying your own fixer upper, fixing it up and renting it out (see below) because you miss out on immediate and forced appreciation.

Here’s how the other criteria pan out:

  • Risk: Moderate to high, but the risk can be mitigated with greater levels of knowledge, experience and relationships. In other words, if you know what you’re doing, you can lower the investment risk significantly. With turnkey properties, you don’t have to deal with the potential of cost overruns that are common with renovations. However, you have no control over the quality of the renovations so you’ll want to be sure that you’re working with a reputable turnkey company or fix and flipper.
  • Level of involvement: High. Since you own the property, you are entirely responsible for the management of the property. However, because you bought the property turnkey, you did not have to renovate the property.
  • Control: High. You own the property so you have full control over the property. You can turn the property into a mid-term rental or short-term rental to maximize the cashflow. You can choose to sell the property at any time.
  • Tax benefits: Moderate to high. With a turnkey property, you may not have enough hours to qualify for real estate professional status, opening up the possibility of sheltering your salary. If you don’t meet real estate professional status, then your tax benefits aren’t as good. It’s more in line with the passive losses you can get with being a limited partner in a real estate syndication.
  • Liquidity: Moderate. Since you own the property, you can decide to sell the property or tap into the property’s equity, if any. Since you didn’t get the immediate or forced appreciation, you may not have as much equity in the property as a fix and sell property (see below).

 

Fix and flip properties

Fix and flip is when you buy a property, fix it up and then sell immediately after the property is fixed up. The way you make money with fix and flip is to acquire the property at a significant discount and then increase the value of the property significantly by fixing it up.

  • Return on investment: Moderate. The return really varies. In some cases, you can lose money with fix and flip, especially if you are inexperienced and you don’t know what you are doing. However, even experienced investors get it wrong or get caught in downward market cycles.

Here’s how the other criteria pan out:

  • Risk: High. As mentioned above, if you don’t know what you are doing, you risk investing more money than you get in return. The more you can buy it right, time things so the market is going up, fix up the property
  • Level of involvement: Very high. Fixing and flipping requires a significant amount of knowledge in property appraising a property’s value, design, managing renovations and budgeting. This is typically not the type of investment you outsource to anyone. You generally are fully involved in all aspects of the fix and flip.
  • Control: High. You have a high level of control because you own the property and you make all of the decisions.
  • Tax benefits: Low. This is where fix and flip is at a significant disadvantage compared to turnkey properties and fix and rent (covered below). Because you typically don’t hold onto fix and flip properties for more than a year, the gains are taxed at ordinary rates. If you held onto the property for longer than a year, you are still taxed at capital gains rates.
  • Liquidity: Low. Although you own the property and can choose to sell at any time, I’m saying liquidity is low during the investment period because you don’t get a return until you see the whole project through. In other words, stopping in the middle of a project isn’t really an option because you’d probably lose money. So you essentially don’t have any liquidity until you complete the fix and flip and sell the property.

 

Fix and rent properties (aka cashflowing rentals)

This strategy starts the same as fix and flip but instead of flipping the property, you hold onto it and rent it out. We refer to these as cashflowing rentals. The main difference between this strategy and buying a turnkey rental is that you get all of the appreciated value, also known as forced appreciation, that you create by fixing up the property. The forced appreciation can be very substantial. There are many examples in our community of investors doubling their invested capital. [Editor’s Note: If you want to learn how to invest in cashflowing rentals, join the waitlist for our course, Zero to Freedom]

  • Return on investment: Very high. The overall return on investment can be very substantial. When we did an analysis of the return, we calculated a 35% to 200+% return. These high levels of return can be achieved when you implement a collection of actions at the same time. We call this The Fast FIRE System.

Here’s how the other criteria pan out:

  • Risk: Moderate to high. As with turnkey rentals, this risk can be mitigated significantly if you know what you’re doing.
  • Level of involvement: High. Since you own the property, you’re going to be involved in all aspects of the property. The level of involvement is going to be even higher than turnkey properties because you’ll also be responsible for the renovation. It’s even higher than fix and flip because you have to rent the property and manage your tenants.
  • Control: High. You have the highest levels of control because you fully own the property. You can negotiate with the seller when you purchase the property, you can decide how you want to renovate the property and force appreciation, you can choose to turn the property into a mid-term rental or short-term rental to significantly boost the cashflow. You can also decide when to sell the property.
  • Tax benefits: High. The tax benefits can be significant when you own your own rentals. However, in order to shelter your salary, you will need to achieve real estate professional status or qualify for the short-term rental tax loophole. Even if you don’t qualify for either status, you still have access to substantial tax benefits.
  • Liquidity: Moderate. Since you are in full control of the property, you can decide when to sell the property. Liquidity isn’t high because there has to be a market for your property. It’s not like a public REIT that can be sold easily. You still have to choose a price, get it ready for sale, list the property and see if there are any buyers out there.

 

Real estate syndications and funds – general partner

We covered syndications above. In this investment strategy, you are the deal sponsor or general partner. Becoming the deal sponsor requires a significant amount of knowledge, experience and relationships.

  • Return on investment: Very high. The overall return on investment is probably in line with cashflowing rentals. It may be lower than cashflowing rentals because the competition for larger properties is fairly high and therefore, the prices get driven up. It can be higher than cashflowing rentals if you don’t invest any of your money and you raise all of the funds to purchase and renovate the property.

Here’s how the other criteria pan out:

  • Risk: Moderate to High. Similar to cashflowing rentals, you can lower investment risk if you know what you’re doing. It may be even lower than cashflowing rentals if you don’t risk any of your money and use other people’s money to buy the property. However, if the deal goes South, you are risking your reputation and the ability to lead future deals.
  • Level of involvement: Moderate to high. With the larger properties, your involvement can actually be lower than cashflowing rentals because you often have the funds to pay for more resources to help you manage the property. Also with larger properties, you often have partners who can also assist with the management.
  • Control: Moderate. You have less control because you typically have partners. Also you have a fiduciary responsibility to your investors (limited partners) so all of your decisions have to be made with your investors in mind.
  • Tax benefits: Moderate to High. The tax benefits are a mixed bag. If you don’t invest any of your own money into the deal, you typically can’t access any of the tax benefits. However, there may be some ways to carve out losses for yourself in this situation. If you figure out how to do this, you get a tax benefit without investing any of your own money! Similar to cashflowing rentals, in order to get the best tax benefits, you need to achieve real estate professional status.
  • Liquidity: Low. Many of the syndication investments are 5 year projects on average. And since you have partners and investors, it would be challenging to pull any money out of the deal. However, if you don’t invest any of your money, liquidity is irrelevant!

 

Real estate development

Real estate development involves leading the creation of a real estate asset from nothing. It usually starts with a piece of land and building a property from the ground up. It can sometimes involve converting an existing property and changing its use. For example, taking an old factory and turning it into an apartment building.

  • Return on investment: Very high. Development involves a lot of moving pieces and carries with it, a lot of risk. So it’s not surprising that development comes with high rewards, that is, if you get it right. You can of course mitigate risk if you know what you’re doing, but there are also going to be more risks that are outside of your control. For example, you might encounter boundary disputes with a neighbor. Because of the longer timelines, you might eventually run into a down economy or inflation. Any of these things can have a significant impact on your return on investment.

Here’s how the other criteria pan out:

  • Risk: High. As above, the risks of development are high. You can mitigate this some if you know what you’re doing and you have a considerable amount of experience.
  • Level of involvement: Very high. You are in charge of all aspects of the development. This is less of an investment, it’s more of a full time job.
  • Control: Moderate. You’re in charge so you have a high degree of control. However, for the bigger projects, you might have partners or investors so this will decrease your level of control.
  • Tax benefits: Very high. Developers have access to the best tax benefits, similar to what you can get with real estate professional status. If you meet certain requirements, you can use the losses to shelter your salary.
  • Liquidity: Low. Similar to fix and flip, your liquidity may be limited until the project is complete.

 

Key Takeaways

So where do you go from here?

You can see that each investment option is different in terms of the six criteria we outlined in Part 1 of this two-part series.

Probably the best place to start is to clearly establish your goals.

For some, it might be to keep your investment risk as low as possible. For others, it might be minimizing tax liability.

For most, it will be a combination of these things.

For example, you can achieve high returns, shelter income from taxes and maintain a high level of control by investing in cashflowing rentals. Or you can minimize your involvement, keep investment risk as low as possible and maintain your liquidity by investing in public REITs.

What strategy stands out as the best real estate investing strategy for you? Did we miss any criteria? Any other real estate investing strategies you’d like us to include?

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page and join our Doctors or Professionals  group!

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

Share

Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

ready to see if
real estate is right
for you? Take The
free Quiz!

If you’re just getting started in your investing career, we have a free resource ready for you. Answer a few quick questions, and you’ll receive a FREE download to help get you results.

Search the Blog

view more posts

Explore

GET STARTED

search